Coffee buyers would be unwise to hope that fears over Brazil's
drought-hit coffee plantations will prove a false alarm, as occurred over
Vietnamese production last year, a leading analyst said, warning over the
potential for farmer defaults.
Robusta coffee futures in March last year hit a high of $2,168
a tonne in London on a front contract basis, a level not seen again until this
week, on concerns over drought in Vietnam, the top producer of the variety, only
for prices to tumble when rains arrived.
Investors had feared that up to 30% of Vietnam's crop would
be lost, thanks to a 30% shortfall in rains in the central highlands, the core
coffee producing region – only for the harvest to end up at a record high
thanks to timely rains.
However, history looks unlikely to repeat itself over the Brazilian
drought which has lifted arabica coffee prices to two-year highs, respected
soft commodities analyst Judith Ganes-Chase said - and not only because "with
below-normal rains still in the forecast, tree could suffer further damage".
'Extreme, intense heat'
Vietnamese plantations last year did not suffer, on top of
drought, the same test from high temperatures that is besetting Brazil's coffee
"The Vietnamese crop did not bake under the extreme, intense
heat that the Brazilian crop has had to endure the past two months," Ms Ganes-Chase
Also, "the length of the dry spell was briefer" in Vietnam's
Furthermore, robusta trees "tend to be heartier than arabica
varieties, which is want is mostly impacted now from the drought in Brazil",
the top producer of arabica coffee.
"Rains at this point are not likely to reverse the damage
done to the crop, but only prevent additional losses," she said.
Arabica coffee prices on Thursday posted a 0.5% gain to
206.25 cents a pound in New York for May delivery, up 80% so far this year, although
failing to match the two-year intraday high of 209.75 cents a pound.
'Forced to declare
Ms Ganes-Chase highlighted expectations that Brazilian
output once expected to approach 60m bags was now seen by many analysts as
coming in below 50m bags, although she added that it was "too soon to predict
with any certainty" how big the crop will be.
One key sign will be if the drought prompts trees to abort
cherries, which are showing fruit size "well behind normal".
"Coffee cherries sliced open show malformed and unformed
The risk for some Brazilian producers, who "typically sell a
large portion of their crop forward", is that they may be caught out, if
production falls below levels at which they have hedged.
"There is a possibility that some farmers may have oversold
their crop and will be forced to declare force majeure and renegotiate or
cancel contracts," she said.
Such events can often fuel price gains, as buyers denied expected
supplies seek cover.
Ironically, Ms Ganes Chase's comparison of Vietnam and
Brazil comes as the South East Asian countries is again witnessing drought in
the central highlands, where it has not rained since the end of November,
according to the Vicofa industry group.
About 40% of the region is under threat from water
shortages, Vicofa, short for the Vietnam Coffee and Cocoa Association, said.
However, "Vicofa has often shown itself to be overly pessimistic
in previous years", Commerzbank analysts noted.